Chapter 15 – Entry Strategy and Strategic Alliances
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Entry Strategy and Strategic Alliances
Learning objectives
• Compare and contrast the
different modes that firms use
to enter foreign markets.
• Identify the factors that
influence a firm’s choice of
entry mode.
This chapter is concerned with three closely related topics:
the decisions of which markets to enter, when to enter
those markets, and on what scale.
Strategic alliances have become more frequent. They may
be seen as one way for firms to enter into cooperative
agreements between actual or potential competitors. The
term “strategic alliances” is often used rather loosely to
include a wide range of arrangements between firms,
including cross-share holding deals, licensing
arrangements, formal joint ventures, and informal
cooperative deals.
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OUTLINE OF CHAPTER 15: ENTRY STRATEGY AND STRATEGIC
ALLIANCES
Opening Case: JCB in India
Introduction
Basic Entry Decisions
Which Foreign Markets?
Management Focus: Tesco’s International Growth Strategy
Management Focus: The Jollibee Phenomenon—A Philippine Multinational
Entry Modes
Exporting
Selecting an Entry Mode
Core Competencies and Entry Mode
Pressures for Cost Reductions and Entry Mode
Chapter Summary
Critical Thinking and Discussion Questions
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CLASSROOM DISCUSSION POINT
Ask students to find several examples of companies expanding into new markets.
Students can use publications like The Wall Street Journal or Bloomberg Businessweek as
sources. Then ask students to consider why the companies involved chose the form of
market entry involved.
OPENING CASE: JCB in India
Summary
The opening case describes the entry of JCB into China. A British manufacturer of
construction equipment, JCB initially entered India in 1979 via a joint venture with
Escorts, an Indian engineering conglomerate, with Escorts holding a 60 percent stake in
the joint venture. As years went by, and Indian regulations changed to give foreign
companies more advantages to doing business in the country, JCB eventually bought out
Escorts, transforming the joint venture into a wholly owned subsidiary. Discussion of the
case can revolve around the following questions:
1. What attracted JCB to India back in 1979? What were the benefits of making a
significant investment in the country?
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LECTURE OUTLINE FOR CHAPTER
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips, and additional perspectives.
Slide 15-4 What Influences Entry Mode Choice
Several factors affect the choice of entry mode including transport costs, trade barriers,
political and economic risks, costs, and firm strategy.
First-mover advantages are the advantages associated with entering a market early.
First-mover disadvantages are disadvantages associated with entering a foreign market
before other international businesses.
Slide 15-10 Scale of Entry and Strategic Commitments
After choosing which market to enter and the timing of entry, firms need to decide on the
scale of market entry. Large-scale entry may keep rivals out and may stimulate
indigenous competitive response. Small-scale entry allows time to learn about the market
and reduces risk exposure.
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Slide 15-15 Exporting
Exporting avoid costs of investing in new location and may help achieve experience
curve and location economies. Exporting faces challenges from tariff barriers,
transportation costs, control over marketing, and local low-cost manufacturers.
Slide 15-16 Turnkey Projects
Turnkey projects allow a company to get a return on knowledge assets and are less risky
than conventional FDI. The disadvantages are that there is not long-term interest in the
location, the project may create a competitor, and if process technology is involved, the
firm may be selling a competitive advantage.
Slide 15-17 Licensing
Licensing does not bear the costs and risks of investment and avoids political/economic
restrictions in a country.
Slide 15-21 Wholly Owned Subsidiaries
Wholly owned subsidiaries offer the most control and the highest level of risk and cost.
Slide 15-22 Selecting an Entry Mode
The optimal choice of entry mode involves trade-offs.
Slide 15-24 Pressures for Cost Reductions and Entry Mode
When pressure for cost reductions is high, firms are more likely to pursue some
combination of exporting and wholly owned subsidiaries.
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Slide 15-27 Pros and Cons of Acquisitions
Pros: quick, preemptive, possibly less risky. Cons: disappointing results, overpay,
optimism/hubris, culture clash, failure of synergies
Slide 15-30 The Advantages of Strategic Alliances
Strategic alliances facilitate entry into a foreign market, allow firms to share the fixed
costs (and associated risks) of developing new products or processes, bring together
complementary skills and assets that neither partner could easily develop on its own, and
can help a firm establish technological standards for the industry that will benefit the
firm.
Strategic alliances can give competitors low-cost routes to new technology and markets,
but unless a firm is careful, it can give away more than it receives.
Slides 15-31 through 15-33 Making Alliances Work
The success of an alliance is a function of partner selection, alliance structure, and
manner in which the alliance is managed.
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CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: Review the Management Focus on Tesco. Then answer the following
questions:
a. Why did Tesco’s initial international expansion strategy focus on developing nations?
b. How does Tesco create value in its international operations?
c. In Asia, Tesco has a history of entering into joint venture agreements with local
partners. What are the benefits of doing this for Tesco? What are the risks? How are
those risks mitigated?
d. In March 2006 Tesco announced that it would enter the United States. This represented
a departure from its historic strategy of focusing on developing nations. Why do you
think Tesco made this decision? How is the U.S. market different from others Tesco has
entered? What are the risks here?
ANSWER 1:
a. Tesco’s global expansion strategy has been rather unique in the grocery industry.
Rather than competing head-to-head with established retailers in developed markets like
QUESTION 2: Licensing propriety technology to foreign competitors is the best way to
give up a firm’s competitive advantage. Discuss.
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ANSWER 2: The statement is basically correct—licensing proprietary technology to
foreign competitors does significantly increase the risk of losing the technology.
QUESTION 3: Discuss how the need for control over foreign operations varies with
firms’ strategies and core competencies. What are the implications of the choice of entry
mode?
ANSWER 3: If a firm’s competitive advantage (its core competence) is based on control
over proprietary technological know-how, licensing and joint venture arrangements
QUESTION 4: A small Canadian firm that has developed some valuable new medical
products using its unique biotechnology know-how is trying to decide how best to serve
the European Union. Its choices are given below. The cost of investment in
manufacturing facilities will be a major one for the Canadian firm, but it is not outside its
reach. If these are the firm’s only options, which one would you advise it to choose?
Why?
• Manufacture the product at home and let foreign sales agents handle marketing.
• Manufacture the products at home and set up a wholly owned subsidiary in
Europe to handle marketing.
• Enter into a strategic alliance with a large European pharmaceutical firm. The
product would be manufactured in Europe by the 50–50 joint venture and
marketed by the European firm.
ANSWER 4: If there were no significant barriers to exporting, then the third option
would seem unnecessarily risky and expensive. After all, the transportation costs required
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CLOSING CASE: General Motors in China
Summary
The closing case describes the entry of General Motors into China. General Motors
initially entered China in 1997 via a joint venture with Chinese automaker, Shanghai
Automotive Industry Corporation (SAIC). General Motors believed that China would
become an important market in the near future. So far, the company’s hunch appears to
be on the mark. China’s auto market was strong even during the recent global recession
giving General Motors something to cheer about even as sales in the United States
continued to fall. Today, the company sells more cars in China than it does in the United
States.
QUESTION 1: GM entered the Chinese market at a time when demand was very limited.
Why? What was the strategic rationale?
ANSWER 1: GM was attracted to China by the enormous potential in a country of more
QUESTION 2: Why did GM enter through a joint venture with SAIC? What are the
benefits of this approach? What are the potential risks here?
ANSWER 2: GM executives believed it was crucial to establish a beachhead in China
QUESTION 3: Why did GM not simply license its technology to SAIC? Why did it not
export cars from the United States?
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ANSWER 3: GM did not want to license its technology because it wanted to retain
QUESTION 4: Why has the joint venture been so successful to date?
ANSWER 4: Because GM tailored its Chinese automobiles to the local needs/tastes of
QUESTION 5: As of 2013 GM appears to be increasing its strategic commitments to
China, building more factories and opening more dealers. Why is the company making
these bets? Do you think it is doing the right thing? What are the potential risks here?
ANSWER 5: Students’ answers may vary but with the increasing middle class in China
earning and spending more disposable income, GM has the opportunity to reap the
benefits of an increase demand for automobiles. The company forecasts that demand in
INTEGRATING iGLOBES
There are several iGLOBE video clips that can be integrated with the material presented
in this chapter. In particular, you might consider the following:
Title: Chrysler Pays Back Billions in Bailout Loans: Is the Comeback
Complete?
Run Time: 11:50
Abstract: This video explores the return of U.S. automaker Chrysler to the global
playing field following its repayment of the bailout money the company was forced to
take after nearly collapsing two years ago.
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Key Concepts: Foreign direct investment, strategic alliances, impact of the multinational
company on the host country, global production, global economy, globalization,
international marketing
Notes: Chrysler recently announced that it had repaid its debts to the U.S. government in
full. The global automaker had been forced to take bailout money from the government
Initially, there was concern that the relationship between Fiat and Chrysler would be
doomed to follow the same path that the Daimler Chrysler venture took, but so far Fiat’s
presence in the company has proved to be positive and Fiat has since increased its stake
in Chrysler to 51 percent and expects to raise that even further in the future. Still,
Chrysler has a long way to go before it can return to its former position in the industry.
Like other U.S. companies, Chrysler has been hurt by the competition among states to
attract foreign investment and the economic benefits it brings. Companies like Nissan and
BMW receive sizeable tax breaks from Tennessee and Alabama giving them a cost
advantage in the marketplace. Chrysler is now taking steps to improve its
Discussion Questions and Answers:
1. Discuss the challenges that lie ahead for Chrysler as it continues its recovery. What
does Chrysler’s revival mean to other players in the industry? What does your response
imply about the nature of the industry?
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Answer: While Chrysler’s recent announcement that it had repaid its bailout debts was a
step in the right direction, the company still has some way to go before it can claim it has
2. Consider the relationship between Chrysler and Fiat. Why is the relationship beneficial
to Chrysler? What does Fiat gain?
Answer: When Chrysler and Fiat initially hooked up some analysts worried that the
alliance would follow a path similar to that of DaimlerChrysler. However, so far, the
relationship between the two companies seems to be successful. Students should
3. Reflect on the tax breaks some states offer to foreign automakers in exchange for
investments. What does the state gain from the investments? Does this practice give
foreign companies an unfair advantage over domestic companies?
Answer: The competition to attract foreign investment is stiff between countries, but it is
also strong within the United States. Many states, especially those in the southern part of
the country aggressively seek investment from global automakers. In exchange for